Understand various ratios while doing financial analysis in Singapore

Gone are the days when business an financial analysis in Singapore was only about buying and selling. Today it is more of a scientific study wherein each and every move of a company is analysed and its impact is calculated. Today instead of looking only at profit and loss account, we study the whole set of financial statements, viz. balance sheet along with all the notes, cash flow statement, profit and loss account along with its schedules, notes to accounts, etc.

We calculate the net worth of a company, assets it holds, liabilities it needs to pay off, capital it has invested and various other things. Nowadays everything about a company is depicted or forecast by analyzing its financial information.

Financial analysis

Financial analysis refers to the assessment of financial statements prepared by the management of a company. It is generally done by users of financial statements like lenders, shareholders, government departments, creditors, financial institutions, potential investors, promoters etc. Financial analysis is done to assess the financial health of an entity like studying its ratios, understanding its shareholding pattern, comparing the data with previous years, etc. This is done to analyze a company’s profitability, stability and other financial indicators.

Financial analysis involves an in-depth assessment of the financial health of a company. It involves an overall scrutiny of a company’s present and past performance. For instance, if a company’s profit declines in two consecutive years then various permutations and combinations will be formed by the users to assess the future profitability of the company. Financial analysis in Singapore is done by calculating financial ratios that work as indicators for better understanding of financial statements.

Financial ratios

In order to understand the financial position of a company you must first understand various financial ratios, that is, their use, purpose and what factor they indicate. Financial ratios might be a little typical to calculate but their understanding makes interpretation of financial statements easy. There are hundreds of different types of ratios that are calculated in order to get a clear cut view on company’s financial health.

For instance, lets talk about debt equity ratio. Debt equity ratio points to the fact whether a company is equity oriented or debt oriented. An acceptable debt equity ratio is 2:1 that means a company is financially healthy if its total debts equal twice the equity share capital it has. Anything above 2 raises an eyebrow and must be checked.

The ratio is calculated by dividing the total amount of debt by the amount of share capital employed. The lower the ratio the more equity oriented a company is. This also means that more profits are available for shareholders.

Similarly, other ratios are also calculated, like Return on Investment (RoI), return on capital employed (RoCE) etc.

Lets take another example.

Dividend is calculated and paid on the face value of a share which is quite less as shares are purchased at market value. So, if a company declares a dividend of 90% and face value of its shares is ₹10, then every shareholder will receive a dividend of ₹9 per share.

So, if a person wishes to receive dividend then he must purchase the shares at the market value and not at face value. Thus he must pay a premium which lowers the amount of dividend substantially. Therefore for better understanding dividend yield is calculated.

If the market value of the share is ₹100 then dividend yield is 9%. That means in order to receive a dividend of ₹9 you must invest ₹100 and he’ll get dividend at a yield of 9%.

Types of financial ratios

Financial ratios are broadly classified into four types, viz. liquidity ratios, solvency ratios, profitability ratios and efficiency ratios. These ratios are calculated to interpret different aspects of financial statements.

Liquidity ratios as the name suggests is used to calculate liquid position of a company, like current ratio. Current ratio provides insight on the company’s ability to pay its short term liabilities. If the ratio is greater than 1, then it means that company has enough current assets to cover its current liabilities.

Similarly, profitability ratios are used to determine the profit margins, cost of goods sold, percentage of sales to purchases made, operating profit etc.